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COMPANY OF THE DAY : NOKIA

Nokia is scheduled to release its Q3 results on Thursday. We expect the company's overall sales decline to improve from last quarter's figure of about 10%. Nokia has built a strong pipeline of orders in Europe and has significant opportunities in the U.S. and China as carriers increase their network spending. Our pre-earnings note details our expectations for the quarterly release.

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FORECAST OF THE DAY : RADIOSHACK'S U.S. STORE GROSS MARGIN

RadioShack's recent debt restructuring deal will give the company more runway for a turnaround. It has been plagued by declining sales and compressed gross margins of late. While we expect the company's gross margins to bounce back slightly, there could be a significant upside to our price estimate if it is able to stabilize sales and cut costs, thereby expanding margins further.

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RECENT ACTIVITY ON TREFIS

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Cree's Q1'15 Results Hit By Weak LED Demand Though Lighting Continues To Grow Strongly
  • By , 10/22/14
  • tags: CREE TGOSY EPIS AGVO
  • Leading LED manufacturer Cree (NASDAQ:CREE) reported its Q1 2015 earnings on October 21st. At $428 million, revenue was in line with the company’s preliminary earnings (announced on October 2), but weaker than its initial guidance of $440 million to $465 million. Strong growth in LED lighting and Power and RF was more than offset by a 13% sequential and 20% annual decline in LED products. Lower LED revenue and a higher mix of lighting sales (which have comparatively lower margins) resulted in lower gross profit, which declined approximately seven percentage points year to year to 31.8%. Cree’s non-GAAP net income declined 42% sequentially  to $30 million, or $0.24 per diluted share. In Q1 2015, Cree spent $68 million on capital projects and $54 million on share repurchases which resulted in negative free cash flow of $55 million. The company targets lower inventory levels and reduced capital spending in Q2 2015, as it plans to reduce the LED factory production rate (in line with demand) to support higher free cash flow over the next several quarters. In tandem, it aims to return to positive cash flow in the ongoing quarter with this reduction in both its working capital balances and its capital spending. Though Cree is lowering its LED factory capacity investments, it targets continued investment for infrastructure projects to support its longer term forecasted growth for fiscal 2016 and 2017. Lower LED demand and margins are two keys trends impacting Cree’s near-term growth prospects. However, the company believes that the lower LED revenue, combined with recent factory productivity improvements and innovations, have created available capacity to support future growth and significantly reduce the company’s capital equipment needs for the balance of fiscal 2015. Our price estimate of $52 for Cree is over 50% higher than the current market price. We continue to believe in the company’s long-term growth potential. The continued growth momentum, combined with a strong balance sheet, gives Cree the flexibility to respond to new market opportunities. We are in the process of updating our model for Q1 2015 earnings.
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    Lexmark Earnings: MPS And Perceptive Business Propel Revenues
  • By , 10/22/14
  • tags: LXK HPQ
  • Lexmark International (NYSE:LXK) released its Q3 earnings on October 21st, and the company posted yet another quarter of solid results, as its managed printer services (MPS) and Perceptive software businesses delivered growth. Furthermore, the company reported 3% year-over-year growth in revenues to $921 million, even as the exit from inkjet division tempered results. The revenues and earnings per share exceeded the guidance range. The stock market reacted positively to the results and the stock price increased by 4%, reflecting market sentiment. It’s imaging solutions and services (ISS) revenues, excluding the inkjet business, grew by 5%, buoyed by 7% growth in sales of laser hardware. Within the ISS division, managed print services (MPS) revenue grew by 12% year over year to $205 million; non-MPS revenue was flat at $570 million and inkjet revenue declined by 29% to $60 million. Additionally, Lexmark’s Perceptive software division continued to post growth as revenues grew by 46% to $86 million (including $16 million revenue from ReadSoft). See our full analysis on Lexmark Outlook For Q4 And 2014 For Q4 FY14, the company expects revenues to decline by 2% to 4% year over year and non-GAAP earnings per share to be in the $1.1 to $1.2 range. Lexmark has revised its revenue guidance for FY 2014 upwards and expects revenue to decline at a slower rate, specifically by 1% or less. Non-GAAP EPS guidance has also been revised upwards to $4.05 to $4.15 range. MPS Revenues Boost Laser Printer Revenues Laser printer and cartridge division is its biggest business unit and makes up for over 77% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market declined for the first time after three consecutive quarters of growth. However, to some extent, resilience in laser hardware sales has offset the decline in total sales. This trend seems to have prevailed in Q3 as well, and Lexmark’s result indicates that it gained the most in laser printer related sales. While hardware revenues grew by 8% year over year to $196 million, supplies revenue declined 2% to $593 million. According to research firms such as Gartner and IDC, Lexmark is a leader in the MPS business. MPS contracts for the company have increased over the past 24 months and offset the decline in non-MPS revenues in the previous quarters. In our pre-earnings note published earlier, we had stated that we expect MPS to propel revenues. MPS was the key contributor to Laser revenue growth as these revenues grew by 12% to $205 million during the quarter, it boosted laser revenues by 5% year over year during the quarter to $775 million. Going ahead, we believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Service contracts tend to be sticky, and MPS is a high margin business compared to selling hardware.  We expect it to become the biggest driver for Lexmark going forward. Perceptive Business Revenues Grow The Perceptive software division is the second biggest business unit and makes up nearly 9% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for Lexmark. During Q3, revenues from this division grew by 46% to $86 million. During the quarter, clients chose to sign up for Perceptive’s evolution subscription service rather than the perpetual license, deferring recognition of the revenue from the second quarter. As a result, the company did witness excellent growth across subscription, maintenance and professional services. While the annual subscription contract value for Perceptive increased by 136% from $19 million in 2013 to $45 million in Q3 2014, licenses and maintence revenues grew by 36% and 62% respectively. The company expects the electronic content management (ECM) and business process management (BPM) segments, which serve a $10 billion dollar industry, to grow about 10% year over year. The company is targeting this segment through Perceptive software, and it continues to build Perceptive’s product portfolio through organic and inorganic means. We also expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company. We are in the process of updating our Lexmark model. At present we have a  $44.77 Trefis price estimate for Lexmark, which is 5% above its current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Kimberly-Clark Gains From Stronger Product Demand In International Markets
  • By , 10/22/14
  • tags: KMB PG
  • Kimberly-Clark (NYSE:KMB) posted strong sales and profits in its third quarter ending September 30, 2014. Quarterly sales increased 3.4% to $5.45 billion, helped by an equal contribution from volume expansion and price increases. K-C International remained the pillars of growth in Kimberly-Clark’s geographic portfolio, growing 10% during the quarter. Operating profits increased 15% during the quarter, resulting in a 1.8% expansion in operating profit margins in Q3FY14. In addition to contributions from strong sales, Kimberly-Clark’s FORCE (Focused On Reducing Costs Everywhere) program generated nearly $100 million in cost savings during the quarter. Additionally, lower general and administrative expenses have supported overall margin expansion, offsetting the effect of a $55 million increase in input cost inflation in Q3FY14. We are in the process of updating our  price estimate of $112 for Kimberly-Clark’s stock to incorporate the latest quarterly results. See Our Full Analysis for Kimberly-Clark Personal Care and Consumer Tissue Businesses Ride on Emerging Market Growth The Personal Care segment, which accounts for over 45% of total sales, marked a robust 4% growth during the quarter to reach $2.48 billion in sales. Organic sales grew 6% for the segment, driven by a 12% gain in organic sales from K-C International. Organic sales of diaper products in China, Russia and Eastern Europe grew 25% while sales in Brazil witnessed a 10% increase. Other categories that contribute a smaller portion to K-C International, such as feminine care, adult care and baby wipes, also reported double-digit organic growth rates. On the flipside, organic sales in North America were down, with volumes down by more than 1% while pricing partially offset the decline in volumes. Product volumes from brands in the adult care segment, such as Kotex and Depend increased at double-digit pace, benefiting from innovations and product promotions. However, volumes declines in baby and child care brands such as Huggies and GoodNites masked the gains in adult care in North America. The strong growth rates in volumes and pricing from K-C International lifted margins for the Personal Care division to 19.5% in Q3FY14 from 18% in Q3FY13, making it the most profitable business line for Kimberly Clark. Kimberly-Clark’s Consumer Tissue business, which accounts for about 31% of total sales, registered nearly 4.5% year on year growth to reach $1.7 billion in quarterly sales. Organic sales grew 3% for the segment, supported by strong volume performance in North America from the Viva Vantage paper towels and promotion campaigns and higher selling prices in International markets such as Latin America. Operating profits also witnessed a surge during the quarter, increasing 22% year on year to $285 million, benefiting from higher prices and volumes. Weak North American Market Slows K-C Professional Sales The K-C Professional segment had a relatively subdued quarter in comparison to Personal Care and Consumer Tissue segments. Sales grew 3.6% to $873 million while margins posted a meager 50 basis point expansion, held back by weak market performance and price erosion in North America. Net sales in North America were 3% lower while Europe and K-C International registered year on year growth rates of 6% and 14% respectively in Q3FY14 sales. Historically, K-C Professional has been Kimberly-Clark’s most profitable division. However, margins from the Personal Care stood higher in Q3FY14, supported by double-digit growth from key emerging markets. Health Care Business Spin-off Scheduled for October End Lastly, Kimberly-Clark’s Health Care segment continued to drag down overall sales. Year on year, sales in the Health Care segment declined 2.7% to $392 million in Q3FY14 due to falling selling prices. Volumes remained flat on a year on year basis due to an increase in demand for protective gear, and surgical and infection-prevention products since the diagnosis of Ebola in the U.S. Margins on the other hand declined about 4% compared to Q3FY13, with quarterly operating profit decreasing by 26% to $52 million due to pricing pressure. Kimberly-Clark will be spinning off its Health Care business by the end of Friday, October 31, and has initiated a restructuring plan earlier this year to improve organizational efficiency and offset the impact of stranded overhead costs after the spin-off. As part of the restructuring, Kimberly-Clark plans to cut up to 1,300 jobs, primarily from its Health Care business through 2016. The spin-off of the health care business should add to improving sales and margins for Kimberly-Clark going forward. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Broadcom's Q3'14 Growth Driven By Strength In Connectivity & Broadband
  • By , 10/22/14
  • tags: BRCM AMD NVDA INTC QCOM
  • Broadcom (NASDAQ:BRCM), a leading semiconductor provider for wired and wireless communications, reported is Q3 2014 earnings on October 21. At $2.26 billion, revenue was up 10.7% sequentially and up 5.3% year over year (at the high end of the guided range and ahead of consensus estimates), driven by strength in set-top box broadband access and connectivity products. The Infrastructure business was roughly flat (in line with expectation), due to a pause in data center and service provider spending. Non-GAAP product gross margin declined by 70 basis points sequentially due to stronger than expected cellular baseband revenue. Non-GAAP earnings per share (EPS) was $0.91 per share, $0.07 above the first call consensus of $0.84 per share. Broadcom announced its decision to exit the cellular baseband business in Q2 2014 on account of intense competition in the market. The company believes this will allow it to eliminate the ongoing losses from the business and enable it to focus on its core strengths in other segments. Broadcom anticipates to complete the cellular cost reductions by year end, faster than originally forecasted. The company expects its revenue to decline marginally in the current quarter, in line with seasonal trends. It anticipates revenue from the baseband business to decline to $50 million, and believes its positions in all three business segments (Broadband, Infrastructure & Connectivity) remains strong. New products across its portfolio will help retain its growth momentum in the future, in our view. Our price estimate of $38.49 for Broadcom is slightly above the current market price. We are in the process of updating our model for the Q3 2014 earnings. See Our Complete Analysis for Broadcom Here Broadcom’s broadband and connectivity revenue (combined) came in ahead of its expectation at $1.51 billion, up roughly 16% sequentially. Strength in connectivity products was driven by the company’s continued leadership in high-end smartphones, tablets and access points as well as the increasing penetration of  802.11AC and 2×2 solutions. The broadband business continues to witness steady growth driven by leadership in set-top box and broadband modems. Strength In Connectivity Driven By Leadership In High-End Smartphones Broadcom witnessed a 20% year-on-year growth in its connectivity business in Q3 2014. The company expected its exit from the baseband business to negatively impact the low-end of its connectivity business, but remains confident of retaining its strength in the high-end. It witnessed exceptional strength and increased traction at the higher end of the business in Q3 2014, which was offset by a decline in the lower end. Broadcom is the No.1 player in connectivity with most of the high end smartphones using Broadcom connectivity solutions. The company does not foresee any change going forward. In Q3 2014, Broadcom’s connectivity business was driven by seasonal demand and new phone launches, as well as increasing penetration of 802.11ac and 2X2 solutions, which drove higher average selling price (ASPs) in the quarter.  During Q2 2014, Broadcom launched the second generation of its 2×2 MIMO 802.11ac combo chip, which improves its industry leading performance for high end smartphones and tablet resulting in faster speeds, lower power consumption, less interference and lower board space compared to its competitors. The 2×2 MIMO 802.11ac combo chip is currently shipping in volume production. Broadcom also launched the industry’s first GPS Sensor Hub combo chip, which significantly reduces power consumption in smartphones and tablets while enabling always on health fitness and life logging applications. The company is also ramping its newly launched LTE and TDS CDMA Solution while maintaining its market leading position in 3G. Additionally, Broadcom sees new growth potential in both emerging markets such as for the Internet-of-Things, as well as the increasing electronics penetration in the automotive and wearable devices markets. The company continues to drive leading-edge features, to maintain its strength in high end smartphones and tablets, and is strengthening and diversifying its portfolio with new low power connectivity solutions for the Internet of Things and the support of iBeacon and HomeKit. Though Broadcom anticipates its broadband and connectivity business to be down sequentially in Q4 2014, we believe the business will see strong growth in the future driven by product cycles and new launches from key customers. Broadband Business To Be Driven By The Set-Top Market & Access Business Broadcom’s strong performance in Broadband in Q3 2014 was driven by growth in the set-top box and broadband access businesses. The company continues to see solid trends in access products as operators deploy the latest technologies including VDSL upgrades to power faster connections in the home. It gained share in VDSL, enjoyed increased operator spending and saw a richer mix of technologies such as vectoring and channel bonding. Broadband access over cooper witnessed meaningful upgrades and the company expects the next DSL standard (G.fast) to begin ramping in 2015. Broadcom also claims to be gaining share in PON and sees new product cycles coming in Broadband Access. The set-top box product group continues to perform well too, and Broadcom gained market share in emerging markets in Q3 2014 as it deployed new HD designs, particularly in Latin America. The company benefits from the rising digital penetration in emerging markets and a ramp to richer features, including multi-stream transcoding, more tuners and a stronger mix of MoCA-enabled platforms. Driven primarily by rising demand from emerging markets, the global set-top box shipments are forecast to grow at a CAGR of 9.7% through 2016. Another long-term growth driver for the set-top box market is the transition to HEVC and Ultra HD. Broadcom claims that the industry is still in the early transition (to Ultra HD) phase and sees this strength as a powerful product cycle that will contribute growth over the coming years. Broadcom is one of the leading players in the worldwide set-top box integrated circuit (IC) market. Q4 2014 Outlook - Net revenue in the range of $2.00 billion to $2.15 billion, of which cellular SoCs should be roughly $50 million. - Broadband connectivity and infrastructure networking to be down sequentially. - Non-GAAP gross margin to be 55%, +/- 75 basis points. GAAP gross margin to be 53%, +/- 75 basis points. - Non-GAAP R&D and SG&A expenses to be down $40 to $60 million and GAAP to be down $50 to $70 million.   View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Colgate Pre-Earnings: Organic Sales In North America, Currency Headwinds In Emerging Markets In Focus
  • By , 10/22/14
  • tags: CL
  • Colgate-Palmolive (NYSE:CL) is slated to release its Q3FY14 results on October 24th. Sales for the largest oral care product manufacturer have been tepid this year, due to significant impact from currency effects and the strengthening US dollar. Net sales in Q2FY14 were flat compared to a similar period a year ago, at $4.35 billion. Currency fluctuations had a negative four percentage-point  impact of sales, excluding which organic sales increased 4% compared to Q2FY13. Within organic sales, growth in volumes contributed 2.5% while pricing gains contributed 1.5%. For the six months in FY14, organic sales grew 5.5%, boosted by a 4% increase in volumes. Gross profit margins for the company expanded by 50 basis points on a year on year basis to 58.6% last quarter, supported by cost savings from its funding-the-growth initiatives and partially offset by higher raw material and packaging materials costs. Operating profits registered a higher growth in Q2FY14, growing 8% to $980 million, helped by one-off restructuring and disposal of asset charges that depressed margins in Q2FY13. On a non-GAAP basis (excluding these charges for Q2FY13), operating profits increased 2% to $1.06 billion in Q2FY14. This resulted in a 60 basis point expansion in non-GAAP operating profit margins during the second quarter of FY14. See our full analysis for Colgate-Palmolive Colgate-Palmolive’s oral, personal and home care products accounts for nearly 88% in total sales. The company is the market leader in most oral care product categories, and has been gaining market share through consistent product innovation and promotions. In the toothpaste category, Colgate has a 44% share worldwide, and is the market leader in the U.K., Germany, Australia, China, Brazil, Mexico, India and Russia. Colgate is also the market leader in the manual toothbrush category, with a worldwide market share of over 33%. However, Colgate lags behind P&G in the mouthwash category, with a market share of 17% worldwide. Mouthwash products have lower product penetration in emerging economies, helping P&G retain its market leadership in the segment through its strong network in developed economies. Oral Care Sales in North America Could Grow Faster on Premium Products Within the domestic U.S. market, Colgate has a 35% share, behind market leader P&G which has a 38% share, and has been aggressively rolling out products to close the gap. Recently, the company launched its latest toothpaste innovation, Colgate Enamel Health Toothpaste, and believes its entry into the fastest growing segment within toothpastes, enamel strengthening, could lead to market share gains going forward. In addition to innovation in toothpastes, Colgate has also benefited from strong demand for premium toothbrush products such as Colgate 360º and Colgate Slim Soft in its biggest markets. The North American market accounts for about 20% of Colgate’s oral, personal and home care revenues. Therefore, strong product uptake from a new product in the premium category should lift volume growth and expand selling prices for Colgate. Impact of Currencies on Emerging Market Organic Sales in Focus Colgate has a much stronger brand presence in emerging markets, as observed from its market leadership position in the biggest emerging markets of China, Russia, Brazil, India and Mexico. In the Latin American market, organic sales increased 8% last quarter, supported by decent volume gains and strong price expansions. However, currency headwinds had a negative 12% impact on organic sales, decreasing net Latin American sales by 4% in Q2FY14. Currency headwinds in Asia had a negative 4.5% influence on organic sales, which registered a 3% increase in Q2FY14, driven by robust demand for toothpastes and manual toothbrushes from Philippines, India and Thailand. Similarly, smaller markets of Eurasia and Africa also had a strong demand for manual toothbrushes and toothpastes, registering an organic sales growth rate of 6.5% year on year in Q2FY14. However, currency headwinds were stronger than the organic growth rate, at 7.5% last quarter, resulting in a 1% decline in reported revenues from the region. For the upcoming quarter, we expect lower impact of currency headwinds on organic sales from emerging markets. The Euro has depreciated significantly against the U.S. Dollar, while most emerging markets currencies have held their ground against the strengthening Dollar this quarter. On the flipside, organic sales could increase further in these markets on the back of higher discretionary income levels and the introduction of premium products from Colgate. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Bristol-Myers Squibb Earnings Preview: What We Are Watching
  • By , 10/22/14
  • tags: BMY MRK RHHBY
  • Bristol-Myers Squibb (NYSE:BMY)  will release its Q3 2014 results on October 24th. We expect strong performance from its key drugs Eliquis and Yervoy. Additionally, the anti-viral drugs business will see the impact of the approval of the HCV drug Daklinza in Europe and Japan. Overall, we expect reasonable growth for Bristol-Myers Squibb. Additionally, the recent HCV approval and the expected approval of its immuno-oncology drug Nivolumab are something to cheer about and could support the company’s growth over next 5-6 years. Here is what the investors can expect from Bristol-Myers Squibb’s upcoming earnings. Our price estimate for Bristol-Myers Squibb stands at $36, implying a discount of about 30% to the market.
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    IBM Earnings: Revenues Miss Expectations Amidst Corporate Restructuring
  • By , 10/22/14
  • tags: IBM MSFT HPQ
  • International Business Machines (NYSE:IBM) posted its Q3 results on October 20. The company reported a marked slowdown in business due to weak client spending and an anemic demand in software sector. As a result, the company reported 4% year-over-year decline in revenues to $22.39 billion (excluding revenues from discontinued operations that include the x86 server business and Microelectronics), and 17% decline in net income to $3.5 billion. The market reacted negatively to the results and the stock price declined by 7% during the trading session on Monday. Even before the results were announced, sentiment surrounding the stock was negative after IBM said that it had at last achieved an agreement to transfer its loss-making semiconductor unit to Globalfoundries Inc. For the quarter, the company witnessed wide decline in sales across its businesses.  While its core software business posted 1.6% decline in revenues to $5.70 billion, Global Technology Services (GTS) revenues declined by 2.9% year over year in constant currency to $9.21 billion. Furthermore, its Global Business Services (GBS) revenues declined by 2.2% to $4.49 billion, despite growth in new business initiatives (i.e.,  cloud, business analytics and big data). IBM’s system and technology division continued to disappoint and reported 15% year-over-year decline in revenues to $2.43 billion, due to product transitions and market disruptions. See our full analysis on IBM Business Restructuring To Affect Topline And Profitability IBM’s system and technology division, which was once a strong cash generator for the company, has witnessed a steady decline that the copany has been unable to properly confront. While this division contributed 25% to IBM’s total revenues in 2006, its contribution fell to just 14% in 2013. The company has also systematically divested its non-profitable units within the hardware business over the past few years, and realigned its workforce to reduce costs. Recently, the company closed the deal sell its x-86 server division as well to Lenovo for $2.1 billion. On Monday, the company announced that it was transferring its semiconductor unit to Globalfoundries, an alliance partner and the former chip manufacturing operations of AMD. Though framed as a sale, IBM is contributing a significant amount to the deal.  It is paying Globalfoundries $1.5 billion to take the unit over and transferring its large patent portfolio as well.  It has also established a 10-year supply agreement for Power and other devices with the foundry.  As a result of these disinvestment, IBM’s revenues will  be lower by $7 billion, however, its margin profile will improve since these businesses posted pretax losses of about $500 million. The company is also recording a $4.7 billion charge on the deal.  Note that IBM’s Semiconductor business is a strategic asset for both the company and the US government.  IBM is a technology leader, supplies critical ASICs to government agency systems, and is engaged as the leading partner in state and other research consortia. The level of regulatory review will be very high and there could be opposition. Growth Economies Disappoint While revenues from the Americas’ were flat at $10.1 billion, the EMEA region (Europe/Middle East/Africa) reported a decline of 8% in revenues to $5 billion. However, the decline in total revenues was accentuated by the decline in revenues from growth markets, which declined by 5%. This decline was driven by a 7% decline in revenues from BRIC countries — Brazil, Russia, India and China. Branded Middleware Boosts Middleware Revenues The software business, which includes the middleware division together with operating systems division, is the biggest contributor to IBM stock value and makes up nearly 47% of our estimate. During the quarter, the software segment (middleware and operating systems combined) reported 2% year-over-year decline in revenues to $5.7 billion. While IBM’s flagship WebSphere software reported single-digit growth at 7%, Rational suite of software reported steep decline in revenues at 12%. Nevertheless, since these solutions cater to the growing markets that include mobile, social and security tools, we expect software division to post robust growth in the near future. Cloud Data Rollout to Positively Impact GTS Revenues in Future The Technology Services division (GTS) accounts for 21% of IBM’s stock value according to our estimates. During Q3, GTS revenues declined by 2% year over year to $9.2 billion. As part of a long-term strategy, IBM sold its customer care business process outsourcing (BPO) services business in Q4 2013 to focus on high margin verticals. The divestiture of this business was completed in Q1 FY14 and continued to negatively impact GTS revenues in Q3. Furthermore, the company stated that it will roll out more cloud data center infrastructure  in the coming quarter to expand its footprint of services, which should augur well for its Softlayer business that encompass strategic outsourcing (10% of estimated value) and integrated technology service (5% of estimated value) division. New Business Initiatives Drive Growth at GBS The Business Services division (GBS) contributes over 11% to IBM’s stock value according to our estimates. In line with our expectation, GBS reported a 1% year-on-year decline in revenue to $4.5 billion, primarily due to declines in traditional packaged application implementation. Moreover, the company continues to be impacted by pricing pressure and client renegotiations, as well as a reduction in elective projects. However, double-digit growth in digital front office, which includes mobile (>100% growth), business analytics (8% growth) and cloud (80% growth), offset the decline in packaged implementation to some extent. As new verticals become a larger part of GBS, they’ll contribute more to the top line performance going ahead. Server and Storage Division Revenues Declines, Albeit at a Slower Pace Server and storage division, which was once the mainstay of the company, is witnessing a continuing decline in revenues. During the quarter, revenues for this division declined by 15% to $2.43 billion. While revenues from System-Z, Power Systems and System-X declined by 35%, 12% and 9% respectively, revenues from storage declined by 6%. The hardware business has been under pressure for a number of quarters. The System-Z mainframe business is in the latter quarters of a product cycle; as a result, sales of system Z suffered by 35%. However, the Power Systems business is focused on high-end Unix and Linux computing. The company is looking to regain its lost market share in midrange systems, and launched entry-level or scale-out POWER8 systems in June, which had a good start compared to the previous cycles. Finally, with the sale of the x86 businesses to Lenovo approved, IBM can move towards reorganizing this troubled business.  It remains a strategic, if very depleted, business to IBM’s integrated technology model and it is now even more dependent on outside parties for critical, even proprietary offerings. We are in the process of updating our IBM model. At present, we have a  $227 Trefis price estimate for IBM, which is about 35% higher than the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Harley-Davidson Earnings Review: Retail Sales Rise As Expected To Strengthen Year-End Shipment Estimates
  • By , 10/22/14
  • tags: HOG
  • On October 21st,  Harley-Davidson (NYSE:HOG) announced lower revenues in Q3 compared to last year, on lower wholesale motorcycle shipments. This result was in line with analyst expectations as the company looked to hold-off shipping motorcycles, after retail sales remained soft in the second quarter, to avoid inventory build-up. Sales from the motorcycle and related products divisions, which together form around 80% of the net valuation for Harley by our estimates, declined 4.2% year-over-year to $1.13 billion in Q3. What underscores the motorcycle maker’s strong performance this quarter is a 3.8% jump in worldwide retail sales, despite cycling the strong 15.5% retail sales growth in the third quarter of 2013, following the launch of the Project Rushmore bikes last August. Harley looked to protect its premium brand image and maintain supply in line with demand, and therefore wholesale shipments and consequently financial results this quarter appeared weak. As expected, the re-introduction of the Road Glide, improved availability of the Street 500 and 750 and higher sales of the Sportster lineup accelerated sales to customers during the quarter, laying down a sound foundation for higher wholesale shipments to dealers in the fourth quarter. Our current price estimate for  Harley-Davidson stands at $64.79, which is around 4% higher than the current market price. The stock jumped 8% just after the announcement of quarterly results. See our full analysis for Harley-Davidson Domestic Retail Volumes Rebound In Q3 After retail sales in the U.S. remained essentially flat to slightly positive in the first half of the year, volumes rebounded to a 3.4% growth in Q3 on the back of pent-up demand and new model launches. The domestic market forms around two-thirds of the net shipments for Harley, which is why sales in the country play a crucial role in moulding the overall results for the company. The two main reasons why volumes were weak last quarter were the absence of the touring motorcycle Road Glide from the 2014 model year and low availability of the much anticipated lighterweight Street motorcycles. Potential Sportster buyers also decided to wait for the Street launch to compare the varying features and make an informed buying decision. Harley managed to overcome these obstacles in Q3, with the launch of the new Road Glide along with other 2015 model year launches in August. In fact, the Road Glide was the highest selling bike from the new model year, but only constituted 4% of the net retail sales this quarter, down from 8% in Q3 2013. This was because the model was only available since the latter part of the quarter, and is now expected to spur domestic sales in the next quarter. Harley also removed the bottlenecks that limited availability of the Street bikes in the U.S. in Q2, thereby witnessing strong growth in Street and Sporter sales in the country through the quarter. Proportionate sales of the Sportster and Street motorcycles increased nearly four percentage points compared to the previous year to 25.8% of the net retail sales this quarter. The 3.4% retail sales growth is in fact a milder reflection of the strong volumes this quarter, as the company was witnessing the 20% growth seen in the U.S. in Q3 2013, following the launch of the iconic Project Rushmore bikes in August last year. Going forward, Harley expects to ship 46,500-51,500 motorcycles in the last quarter, flat to 10% above the last year’s fourth quarter shipments of 46,618 motorcycles. With anticipated strong demand of the Road Glide and Street bikes in the fourth quarter, motorcycle shipments in the domestic markets could get a boost, consequently pushing overall shipments for the fourth quarter closer to the higher estimated figure. In particular, the Street 500 and 750 are expected to contribute additional sales to the top line. The two models are expanding Harley’s reach to new and outreach customers, which means that the company’s sales in the coming future could remain strong in its biggest sales-base, the U.S.. This is despite the ageing core customer base of baby boomers. Harley continues to expect shipments of the Street bikes to range between 7,000-10,000 units for the full year, buoyed by encouraging initial sales in the U.S., India and Southern Europe. Now the company plans to increase shipments of the Street in Europe in the fourth quarter, and enter other markets by next year, which should see volumes rise significantly by this time next year. Gross Margins Decline On Lower Revenues As expected, Lower wholesale shipments dragged down net revenues and consequently gross margins for Harley’s motorcycle business this quarter. Margins fell to 34.9%, down 40 basis points from last year, but this figure was still above the company’s expectations. A higher proportionate mix of the Street and Sportster motorcycles, which carry thinner margins, was expected to lower the margins. However, led by strong Road Glide sales, sales of touring motorcycles also improved simultaneously, somewhat offsetting the impact of the lower range bikes. Harley expects operating margins for the motorcycle division to range between 17.5% to 18.5% for the full year, up from 16.6% in 2013. Despite operating margins remaining low at 12.9% in Q3, margins through the first nine months stand at 21.3%. This means that the company now expects another quarter of lower margins, due to the unfavorable mix impact and higher start-up costs related to the Street motorcycles. The third quarter figure was also negatively impacted by an additional $14 million, almost 10% of the net operating income, due to the two recalls issued in the quarter. Harley’s operating margins in the fourth quarter might be above the expected levels due to higher shipments, as well as due to the benefits of restructuring that completed last year. While motorcycle fixed costs were 20%-25% of variable costs at the beginning of restructuring operations in 2009, the figure is expected to decline to 15%-20% for the full year. This will lower the degree of operating leverage for the company, and mean higher margins on incremental sales. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Lear Corporation Pre-Earnings: Strong U.S. And China Sales To Boost The Top Line In Q3
  • By , 10/22/14
  • tags: LEAR LEA JCI UTX GM F DLPH
  • The automotive interiors supplier  Lear Corporation (NYSE:LEA) is scheduled to announce its third quarter results on October 24. With increases in global vehicle production levels this quarter, fueled by growth in North America and China, sales for automakers and in turn for automotive interior manufacturers should also rise. Lear’s top line has expanded by nearly 11% in the first half of the year mainly on the back of higher vehicle demand as well as more interior content per vehicle. We expect another quarter of strong revenue growth for the company on the back of higher global vehicle production, which could slightly be offset by lower volumes in Europe and South America, given the tough economic conditions. However, despite lower overall vehicle volume sales in Europe and South America, premium vehicle volumes have remained strong in both the continents. This means that even though Lear could have supplied seating and electrical interiors to a lesser number of vehicles in Europe and South America this quarter, higher average content per vehicle due to higher proportionate sales of luxury and electrical vehicles could boost the net revenues. Lear has also aimed to increase its productivity in both the seating and electrical divisions by removing bottlenecks in the operations in the Americas and by leveraging a low-cost structure. Seating division margins could rise to 5.5-6% again for the full year, after falling 120 basis points to 4.8% in 2013, while margins for the electrical division are expected to range between 11.5-12% this year, twice the 2011 levels. We estimate a $98.92 price for Lear Corporation, which is roughly 19% above the current market price. See our full analysis for Lear Corporation Automotive stocks have in general taken a hit in recent times. The overall S&P Index has declined in the last three months, but the stocks of GM and Ford, the largest clients of Lear that formed 44% of the net sales last year, have fared even worse. Lear’s stock has performed slightly better than the stocks of automakers in the last three months, but still lags the growth in broader indices. The company’s stock has plunged by nearly 20% since reaching a high of $103.74 on September 8. However, we value Lear’s stock higher than the current market price due to anticipated strong worldwide vehicle demand, increasing content per vehicle and expanding margins, as the company looks to increase cost-effectiveness. U.S. And China Sales Remain Strong, Could Boost Lear’s Top Line North America sales formed 37% of the net sales for Lear through the first half of the year, and continual strong vehicle production levels in the region could boost the company’s top line in Q3 as well. Light vehicle production in North America rose almost 8% in the third quarter, after rising 4% in the first half of the year. This increase in vehicle demand also led to an 8% year-over-year increase in GM’s retail sales in the quarter in the U.S., while the company’s global volumes grew 2% during this period. Lear should also benefit from higher sales for GM, as well as for its other automaker clients such as BMW, Daimler, Volkswagen, Fiat, Hyundai, Jaguar Land Rover, Peugeot and the Renault-Nissan Alliance, in North America. On the other hand, although the rise in vehicle production in China is estimated at 9% this year, down from double-digit growth percentages in the last couple of years, the country’s automotive market is still the fastest growing in the world. GM’s retail sales in China increased by 12% in Q3, reflecting continual strong vehicle demand in the country where disposable incomes continue to rise. On the other hand, although Ford sells considerably lower volumes compared to its compatriot GM in China, the former’s sales are up 30% so far in the year, outpacing the growth in the country’s overall automotive market. This bodes well for Lear as high vehicle demand means inflow of additional business for the company. Bolstered by high vehicle production volumes in the U.S. and China, Lear’s revenues could rise by 8.5-10% this year, as estimated by the company. Higher Content Per Vehicle Owing To Strong Electric And Luxury Vehicle Demand Why we expect Lear’s revenues to rise by a high single-digit percentage this quarter, more than the expected rise in global vehicle production volumes, is because of an estimated simultaneous increase in revenues per vehicle. This is because of increased sales of electrically-controlled and luxury vehicles. Electric and hybrid electric vehicles almost double the electrical content requirement of a car. On the other hand, premium vehicles require more electrical content, as well as higher seating content per unit. Demand for these vehicles has remained high, and this should boost Lear’s content per vehicle and consequently the net revenues in Q3. Lear supplies electrical content for the Chevy Volt and Cadillac ELR, manufactured by GM, the company’s largest client. Cadillac ELR began selling in December in the U.S. and has sold almost 900 units since. Electric vehicle sales in the U.S. have increased 25% year-over-year through September, and could continue to rise as consumers switch to economically and environmentally viable vehicles with improvement in battery charging infrastructure in the country. Lear supplies seating and electrical interiors to premium automakers such as BMW, which constituted around 10% of the net sales in 2013, and also to companies such as Volkswagen’s Audi, Daimler’s Mercedes-Benz, Chrysler and Jaguar Land Rover. In fact, Lear is the exclusive seating provider for some of the compact models made by the German automakers BMW, Audi and Mercedes in Europe. Although overall automotive volumes have still not picked up in the European Union following the double-dip recession, luxury vehicle volumes have grown in the region. BMW reported a strong 7% rise in vehicle volumes in Europe last month. This means that even though overall vehicle production volumes could drop in Europe this quarter, continual growth in premium vehicle sales should benefit Lear’s business. Europe and Africa form the largest sales-base for Lear, contributing almost 40% to the net sales in the first half of the year. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Dr. Pepper Snapple Pre-Earnings: Margins Could Expand On Higher Volumes And Pricing
  • By , 10/22/14
  • tags: DPS KO PEP BUD
  • Dr Pepper Snapple (NYSE:DPS) is scheduled to announce its third quarter results on October 23. While the S&P 500 Index has declined in the last three months, the company’s stock has grown by over 9%, outpacing the growth in  The Coca-Cola Company (NYSE:KO) and  PepsiCo ‘s (NYSE:PEP) stocks during this period. Dr. Pepper mainly operates in the U.S. and Canada, which together form over 90% of the company’s valuation by our estimates, while the rest is contributed by Mexico and the Caribbean. In particular, we estimate that the carbonated soft drinks (CSD) portfolio in North America generates over 70% of the net sales for Dr. Pepper. As the demand for CSDs continues to decline in the domestic market, we don’t expect a meaningful year-over-year increase in the Texas-based manufacturer’s top line this quarter, in line with the company guidance of flat to 1% revenue growth for the full year. But Dr. Pepper could generate additional cash flow and thereby create value for shareholders in Q3 by expanding margins.  We have a price estimate of $56.81 for Dr Pepper Snapple, which is around 11% lower than the current market price. The company expanded its operating margins by almost 400 basis points to 20% through June. In contrast, Coca-Cola and PepsiCo improved their margins by only 20 and 50 basis points to 23.9% and 15.9% respectively during this period. If long term margins for Dr. Pepper’s North America CSD division rise to 26%, up from our current estimate of 23.4%, there would be a 10% upside to our valuation for the company. See Our Complete Analysis For Dr Pepper Snapple Beverage Volumes In The U.S. Could Remain Flat To Negative Despite growing consumer concerns over the high sugar and calorie content of soft drinks, which has stalled growth in the U.S. CSD market for nine consecutive years, Dr. Pepper has managed to secure steady growth by increasing its market share and improving its operating performance. The domestic CSD market is mature, with Coca-Cola, PepsiCo and Dr. Pepper accounting for almost 90% of the industry-wide volumes. According to our estimates, Dr. Pepper’s market share has risen in each of the last four years, reaching 17.5% last year. According to Wells Fargo, Dr. Pepper’s soft drink volumes and net pricing each grew 0.4% year-over-year in Q3 in measured convenience store channels, buoyed by an overall jump in CSD demand in the retail space during this period. We expect net soda volumes for the company to grow only slightly, if at all, in the U.S. this quarter. Dr. Pepper’s achilles heel in the domestic market has been its underperforming non-carbonated beverage portfolio. While volumes in this segment have grown for both Coca-Cola and PepsiCo, Dr. Pepper’s lack of strong products in the fast growing segments such as organic juices and sports drinks has seen the company’s non-sparkling beverage volumes decline in both Q1 and Q2. Due to lower promotional activities, and the overall slump in juice volumes, as consumer shift away from calorie-fueled beverages, volumes for the juice brand Hawaiian Punch declined 8% and 12% in the first and second quarters respectively. This quarter could entail more of the same for Dr. Pepper’s ailing juice brand. On the other hand, Snapple volumes also declined last quarter, as Dr. Pepper deprioritized the value line, which typically formed around 10% of the ready-to-drink (RTD) tea brand’s volumes. Tea carries a positive consumer perception as a convenient and healthier hydrant containing antioxidants that boost metabolism. Snapple and Diet Snapple are established products in the RTD tea segment, and together hold a market share of 8% with sales of over $400 million last year. Although volumes could again fall for Snapple this quarter due to lower sales of the value line, a favorable price mix due to higher sales for the premium business could boost the top line. The Snapple premium business increased 1% in the last quarter, and Dr. Pepper looks to leverage the high demand for iced tea to increase Snapple sales, but at the same time push for higher sales of the premium higher priced packs, which contribute more to the margins. Mexico Volumes And Sales In Focus Amid Increased Taxes Despite the soda tax enacted in Mexico at the beginning of the year, Dr. Pepper’s beverage volumes in Latin America rose by 5% in the first half of the year. Mexico, which forms around 90% of the company’s business in Latin America, had imposed a one-peso-per-liter (~8 cents) tax on sugary sodas, effective as of January 1, as the country battles widespread obesity, diabetes, and other health issues. In fact, around 32.8% of Mexico’s population in obese, the highest figure for any country. Around three-fourths of Dr. Pepper’s beverage portfolio in the country is subject to the soda tax. The tax has on an average made soda more expensive by around 8%. As over half of Mexico’s population lives below the national poverty line, price-sensitive customers could have been dissuaded from soft drink consumption. However, an increase in volume sales so far this year reflects high demand for Dr. Pepper’s products, especially the carbonated water brand Penafiel, which grew by an impressive 22% through June. If Dr. Pepper’s Latin America volumes continue to rise this quarter, revenue-growth could be high in the region, given the higher net pricing. Even though the higher product prices don’t impact the margins, as the company just passes the added tax onto customers, Dr. Pepper’s operating margins rose 180 basis points year-over-year to 14.1% in the first six months, fueled by lower commodity costs and productivity improvements. Profitability could improve again this quarter if volumes remain high, similar to the trend seen in the last two quarters, despite the impact of the soda tax. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    VeriSign Q3FY14 Preview: Company Strives To Regain Growth In The Face Of Competition
  • By , 10/22/14
  • tags: VRSN
  • VeriSign (NASDAQ:VRSN), the leader in the Domain Name System (DNS) market with a 47% market share, is set to release its third quarter earnings for the financial year 2014 on October 23rd. VeriSign is the authoritative registry service provider for all .com and .net gTLDs (Generic Top-Level Domains), as well as the sole registry service provider for gTLDs like .cc, .tv, .gov, .jobs, .edu and .name. The company registered a 5% increase in sales in the first half of 2014, with revenues of $499 million as against revenues of $476 million for the corresponding prior-year period, when in fact it was growing annually by 10%. This slowdown in the growth rate was primarily due to saturation in the .com domain, a fall in the renewal rates for .com and .net, and a rising demand for a large number of long awaited country code top-level domain names (ccTLDs) and other new generic top-level domains (gTLDs). The company expects the FY 2014 revenues to be $1.003 billion to $1.012 billion with an annual growth rate of approximately 4% to 5%. The non-GAAP gross margin is expected to be at least 80% and with a non-GAAP operating margin  of 59% to 61%. Our price estimate of VeriSign at $55.33 is at a 1.4% discount to the current market price. We will update our valuation after the Q3 2014 earnings release. See our complete coverage of VeriSign Domain Name Saturation, Declining Renewal Rates, And Growth In ccTLD Leads To Declining Growth The .com domain name has be come increasingly saturated in recent years, causing limits to new additions. In Q2 2014, after processing around 8.5 million registrations, only 0.42 million net additions could be made to the .com domain root zone. In contrast, 1.22 million net additions were made in Q2 2013. This decline might be further compounded by the price hike in the .net domain annual fee from $6.18 to $6.79 beginning February 2015. The total base of active registered domain names, at the end of June 2014, stood at 128.9 million (113.7 for .com and 15.2 million names for .net), representing a 3.7% year-on-year growth. The .com and .net renewal rate for the Q1 2014 was 72.6% compared to 73.2% in Q1 2013. Renewal rates cannot be measured until 45 days after the end of quarter. VeriSign estimates the Q2 renewal rates were 71.7% as against 72.7% for the same period last year. Management attributed this decline mainly to changes in search algorithm, lower first-time renewal rates in certain geographies, and the promotions by previous year registrars (or lack thereof). The slowing growth has been further exacerbated by the growth of .ccTLD domain registrations in non-US markets. The .ccTLD is growing in popularity amongst companies due to the favorable government policies regarding their adoptions. The ccTLDs can only be used by countries and territories. An increasing number of businesses, especially SMEs, are migrating to this domain because of policies intended to encourage their adoption.  These include  a registration requirement relaxation, free domain names subject to specific usages, and so on. In its Q1’14 Domain Name Industry Brief, VeriSign reported that .ccTLD registrations have grown at more than thrice the growth rate of the .com and .net domain names. VeriSign Increases Marketing Spend To Sustain Top Position VeriSign has increased its year-on-year marketing spend by 6% to $44 million in the first half of 2014. The company expects the marketing expenditure to rise over the coming quarters. The company channels the majority of its marketing campaigns through affiliate registrars such as GoDaddy and BigRock, or other resellers to promote its .com and .net domain registrations and drive awareness for the brand across geographies. It has also applied for International Domain Names (IDN) for overseas market. Hence, once they’re available, it plans to spend on partnering with overseas registrars for the marketing of its offerings. Recently Google announced to act as a registrar and sell a package of services, including domain names, with the aim of developing online presence for smaller businesses in the US. The .com and .net domains would be amongst its offerings. Hence, the management believes that Google acting as a “retail outlet” for their products will greatly aid in expanding its reach. Long Term Sustainability of gTLD Remains Questioned According to VeriSign, there are some uncertainties regarding the long term growth of new gTLDs. The gross registrations for the first half 2014 is over 1.6 million. They haven’t gone through a renewal cycle yet to arrive at a net figure. The growth has been rapid with a lot of sales of premium domain names. A majority of registrations is suspected to have been done by speculators. Speculators buy popular domain names to sell them for a profit later on. Hence the sustainability of these gTLDs is definitely a question which only time can answer. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Cliffs' Earnings Preview: Lower Iron Ore And Coal Prices To Weigh On Results
  • By , 10/22/14
  • tags: CLF RIO VALE MT
  • Cliffs Natural Resources (NYSE:CLF) will announce its third quarter results on October 27 and conduct a conference call with analysts the next day. We expect lower iron ore and metallurgical coal prices to negatively impact Cliffs’ quarterly results year-over-year. In addition the company will report a $6 billion impairment charge mainly due to the depressed commodity pricing environment as a part of its third quarter results. The third quarter earnings release will be the first since Casablanca Capital won control of the company’s board through a proxy contest. The new management’s stated strategy for Cliffs involves focusing on its U.S. Iron Ore business segment and the sale of its other operations. The conference call on October 28 will provide an opportunity to the new management to further voice its plans to operate the company competitively in a subdued iron ore and coal pricing environment. See our complete analysis for Cliffs Natural Resources Iron Ore and Coal Prices Iron ore and metallurgical coal are important raw materials for the steel industry. Thus, demand for these raw materials by the steel industry plays a major role in determining their prices. Though a majority of Cliffs’ iron ore sales are to the North American steel industry, sales agreements are benchmarked to international iron ore prices. International iron ore prices are largely determined by Chinese demand since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. Weak demand for steel in China has translated into weak demand for iron ore. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. A slowdown in economic growth has tempered the demand for steel. China’s GDP growth is expected to slow to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. Further, a Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, the tightening of credit by Chinese banks to steel mills that are not performing well, will negatively impact these mills’ prospects. Furthermore, the Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for steel in the long term. The weak Chinese economic prospects are captured by the Manufacturing Purchasing Managers’ Index (PMI). The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, stood at 51.1 for September, and has ranged between 50.2 and 51.7 for the whole year. With weak Chinese manufacturing growth, demand for steel is expected to remain subdued in China. On the supply side for iron ore, expansion in production by majors such as Rio Tinto and BHP Billiton despite weak Chinese demand, has created an oversupply situation. A combination of weak demand and oversupply is likely to result in lower iron ore prices in the near term. Iron ore prices stood at $82.38 per dry metric ton (dmt) at the end of September, around 38% lower than at the corresponding point of time last year. As per Goldman Sachs, the worldwide surplus of seaborne iron ore supply will rise to 175 million tons in 2015, from an expected 72 million tons for 2014 and 14 million tons for 2013. In view of the persisting oversupply situation, iron ore prices will remain subdued in the near term. This will negatively impact the company’s third quarter results. China is also the largest consumer of metallurgical coal in the world. Demand for the commodity by the Chinese steelmaking industry has been weak, adding to subdued demand from other major consumers such as Japan and the EU. Weak demand coupled with an oversupply situation due to expansion in production by major mining companies, has resulted in plummeting coal prices. This will have a negative impact on Cliffs’ North American coal business, which primarily sells metallurgical coal, whose prices are linked to prices of Australian metallurgical coal. The benchmark Australian metallurgical coal price stands at around $119 per ton, around a third of its 2011 peak level of $330 per ton. In view of the oversupply situation, metallurgical coal pricing is expected to remain subdued. Cliffs’ Response and Other Developments In order to remain competitive in a subdued iron ore and coal pricing environment, Cliffs has cut costs as well as adopted a strategy of disciplined capital allocation. The company had earlier reduced its planned capital expenditure for 2014. The revised full-year capital expenditure range for 2014 is $275-$325 million, around $100 million lower than its original guidance of $375-425 million, and approximately 65% lower year-over-year. Around 75% of the planned reductions in capital expenditure are targeted at the company’s high-cost Eastern Canadian Iron Ore operations and North American Coal operations. The company recently announced that it expects to record an impairment charge of approximately $6 billion on its seaborne iron ore and coal assets in the third quarter. The impairment charge is mainly due to the company’s revised outlook on pricing and market conditions for these commodities. The new management favors focusing on the company’s U.S. Iron Ore operations and the sale of its high-cost assets. These include the assets of the company’s North American Coal, Eastern Canadian Iron Ore and Asia-Pacific Iron Ore business segments. The new management has already signaled its intent to sell off assets from the North American Coal division. In an SEC filing, the new management reversed the decision of the former management to idle the Pinnacle coal mine, if market conditions did not improve. The reason given for this decision was to ‘facilitate unlocking the value of assets’. Keeping the mine operational is desirable if it is to be sold off. Expectations from Conference Call With the subdued iron ore and coal pricing environment set to continue in the near term, we would like to know whether the company has identified any other opportunities for reductions in operating costs or capital expenditure. We would also like to know if any asset sales, as per its strategy, are on the horizon. More clarity on this front will shed some light on the road ahead for Cliffs. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Earnings Preview: Strength In US and China Should Keep GM's Topline Growing
  • By , 10/22/14
  • tags: GM F VLKAY
  • General Motors (NYSE:GM) is scheduled to announce its Q3 FY14 earnings on October 23. In the second quarter, GM’s earnings were down on account of high expenses related to car recalls but strong core performance meant that the company’s revenues were slightly higher compared to last year. Net Revenue for the quarter came in at $39.6 billion, slightly higher than the same figure in the previous year’s second quarter. The increase of $600 million was attributable to the effects of a favorable sales mix, higher average pricing and increased revenue from GM’s Financial Division, which was partially offset by lower wholesale volumes and the negative impact of the translation of the Brazilian Real and Argentinian Peso to the U.S. dollar. In our note below, we take a look at the numbers we will be watching out for in the latest earnings report. We have a  $40 price estimate for General Motors, which is about 30% more than the current market price. North American Operations Steady North America accounts for about 35% of the company’s unit sales. In the second quarter, GM North America’s (GMNA) revenues came in $2.2 billion higher at $25.7 billion compared to the second quarter of fiscal 2013. This increase of close to 10% was driven primarily by higher average unit prices in the region. The company’s market share in the continent stood at 17.2%, flat versus the market share in last year’s second quarter but up 0.9% from the first quarter, with a 17.9% share in the U.S. Excluding the impact of recall expenses, GMNA’s operating margin was above 9% for the quarter and up 1.15% for the first six months of the year compared to the same period in the previous fiscal year. With a number of new or refreshed model launches throughout the year, margins as well as unit sales should continue to remain strong. Furthermore, a slew of model refreshments under the Chevrolet and Cadillac brands have pushed up the average pricing and helped GM realize higher margins. Through the four quarters of 2013, the North American operating margins rose 60 basis points to 7.8%, spurred by the Chevrolet, Buick, Cadillac and GMC, with all increasing their retail market shares in North America. European Operations Could Improve Europe has been a worry not only for GM but for a number of other automakers as well. The European automotive market was in a free fall till 2012. The market was in red till the first half of 2013, but things improved in the second half of the year. Now with the market rising, there is once again a renewed optimism about Europe. GM plans to release 23 new or refreshed models by 2016 and hopes to become profitable in the region by the mid-decade. In the second quarter, GM’s European operations were unprofitable as expected due to restructuring related expenses. However, the company’s subsidiary Opel Vauxhall showed continued strength in the region, with sales increasing 4% and market share increasing by 0.08% year-to-date. Even though GM’s overall market share in the region is down to 6.8% due to the shutdown of Chevrolet’s European operations, its overall market position in Europe is improving and this effect can be directly attributed to Opel Mokka and Insignia, the company’s new flagship brand. The company is planning to undertake investment well in excess of $5 billion over the next few years in order to develop 27 new cars and 17 new engines under the Opel brand, which will start offering budget cars for the first time under its nameplate. GM’s market share in the European car market has shrunk from 10.4% in 2008 to 6.8% in the present quarter, a major decline when you factor in the 23% decline in the market size over the same period. The U.S. based auto maker is trying to restructure its European operations in order to return to profitability by 2016 and aims to reach a 5% operating margin by 2022. Chinese Sales Should Remain Strong China is GM’s largest automarket and accounts for over 35% of the company’s unit sales. GM’s sales in China were up 8% in the second quarter and the net income margin improved by 0.6% to reach 10% for the quarter. The automaker’s share of the world’s biggest auto market stood at 14.4% for the quarter, flat versus the share in the same quarter last year. GM’s market share is due to the growth in the company’s Cadillac, Buick and Wuling brands. The company also expects the sales growth rate of Chevrolet to catch pace in the future as sales of the new Trax crossover gather steam. Crossover and SUV demand in China is expected to grow at about a 10% annual rate and reach about 7 million units by 2020. With the help of lower prices, GM is targeting a 10% market share in the Chinese luxury market by the end of the decade. That could translate to more than 250,000 units annually just from the sale of luxury cars. If the proportion of higher priced vehicles rises, we could see a healthy increase in the average equity income earned per vehicle. Volkswagen overtook GM as the largest automaker in China in 2013, but GM is working to regain its position as the market leader in the country. The automaker has plans of building five more plants in 2014, in an effort to increase its manufacturing capacity by 65% by 2020. GM expects its China sales to grow by 8-10% this year, in line with the overall growth of the Chinese market. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Earnings Preview: Strength In China, US Should Keep Ford's Bottomline Growing
  • By , 10/22/14
  • tags: F GM TM
  • Ford Motors (NYSE:F) is scheduled to announce its Q3 FY14 earnings on October 23. The company finished 2013 on a high, recording an 18th consecutive quarter of pre-tax profit and its automotive division posted unprecedented cash flow of $6.1 billion for the full year. However, shares of the automaker fell soon thereafter when the company announced that it expects its margins to face a downward pressure in 2014. For 2014, the automaker anticipates the full year profits to be in the region of $7 billion to $8 billion. The cautious guidance on profits reflects the company’s plans for a comprehensive re-haul of the company’s product line up. In 2014, the automaker will roll out 23 new models globally, the most aggressive product launch made by the company in its history. We have a  $18.66 price estimate for Ford, which is about 20% more than the current market price. North America To Deliver Most Of The Profits In the second quarter, Ford’s North American wholesale volume declined by 5%, while its revenues declined by 3%. The decline in revenue is explained by lower market share and an unfavorable change in dealer stocks, offset partially by higher industry sales. The U.S. auto market, the biggest and most profitable market for Ford, is on pace to record a 7.6% growth on last year’s volumes. Ford’s total U.S. market share was 15.3% in the second quarter, a decrease of 1.2% from a year ago and flat with the previous quarter. This drop reflects the planned reductions in daily rental sales, a lower share of Ford’s Edge and Focus in the sales mix and the reduced production levels of the F-series. The company closed many of its factories during the previous quarter in order to retool them for the new F-series trucks, which will be aluminum bodied instead of steel and thus more fuel efficient. In order to compensate for the decline in production, the company pushed out extra inventory to its dealerships and offered several incentives to clear out the inventory. The operating margin for region was 11.6%, an increase of 1 percentage point from 2013 and pre-tax profit was $2.4 billion, up $119 million from last year’s record profit. In this quarter, we expect the trend to reverse as most of the decline in the number of units sold in the previous quarter was due to the shut down of production in Ford’s factories. Absent that, the company’s sales should have stayed flat or even increased compared to the past year. With the launch of the new, lighter bodied F-150 series of trucks, we’d expect Ford to deliver higher numbers and higher profits from North America in this quarter. European Operations Could Improve Further In Europe, the company expects reduced losses as the European transformation plan remains on track to achieve profitability by 2015. The year started off poorly for Ford in Europe, but a spate of model refreshments and new introductions have helped the automaker outperform the broader market in the last few months. Ford had earlier aimed to introduce a total of 15 new or refreshed models in Europe over the next five years, but now plans to raise that figure to 25, starting with the debut of the affordable SUV EcoSport early this year. In addition, the European built Mustang is ready to be introduced as well. The automaker is also adding a premium car Vignale to its product portfolio, which the company believes should improve its image. It is highly critical that brand Ford resonates positively with Europeans. A strong brand will help Ford accelerate sales whenever the market starts consolidating again. Chinese Sales Keep On Surging Ford’s sales in the country were so strong in 2013 that the automaker overtook Honda and Toyota as the fifth largest shareholder of auto sales by foreign companies in the region. Ford’s sales have shown continued strength in 2014 as well as the company recorded a 45% expansion in the first quarter of 2014 and a 26% expansion in the second quarter of 2014. The company is set to overtake Nissan and Hyundai in the region. Vehicle sales were boosted by the introduction of seven new or refreshed models including the EcoSport, the Kuga, the Fiesta and the Mondeo, which appeal to the value seeking Chinese customers. With close to a million unit sales, China has now become one of the biggest markets for Ford. It is also important to note that sales growth in 2013 was unusually higher due to the introduction of a number of new, mass-appealing vehicles. We expect this trend to continue as the company has announced that it plans to add 15 new models to its fleet in China.  With a number of higher end models still to be introduced (such as the Lincoln brand), the next set of vehicle introductions should have a greater contribution towards the profits, if not towards the unit sales growth. See full analysis for Ford Motors See More at Trefis |  View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
    UPS Logo
    UPS Earnings Preview: E-Commerce Sales To Drive Revenue And Operating Expense But Temper Yields
  • By , 10/22/14
  • tags: UPS FDX
  • United Parcel Service (NYSE:UPS) is set to announce its third quarter 2014 earnings results on October 24 2014. We anticipate that the growing e-commerce industry will drive UPS’ third quarter revenue and package volume. A decline in revenue per package will remain a concern for the quarter. In the past few quarters, revenue per package has been declining due to the shift in customer preference towards more economical means of shipping packages and growth in e-commerce packages. In anticipation of a high volume of e-commerce packages during the upcoming holiday season, the company has decided to invest in its network in order to not repeat the fiasco witnessed during Christmas 2013. This should have some impact on the third quarter operating costs. In the second quarter, UPS posted 5.6% year-on-year growth in revenue, to reach $14.27 billion. UPS’ net profits declined 57.6%, to reach $454 million, due to recognition of a charge related to the transferring of post retirement liabilities of certain employees to defined contribution plans. Excluding this impact, UPS’ net profits increased 4.5% driving 7% growth in earnings per share, which reached $1.2. See Our Complete Analysis of UPS UPS’ U.S. domestic package revenue volume likely to grow on e-commerce sales E-commerce sales directly impact UPS’ package volume and revenue since many online retailers, such as  Amazon (NASDAQ:AMZN), employ UPS’ services in order to offer their customers timely and economical delivery of products. Therefore, growth in the e-commerce industry bodes well for UPS. In 2013, U.S. e-commerce sales grew 17%, increasing its contribution to overall retail sales from 5.2% to 5.8%. This is because, not only is online shopping more convenient, but has also become more accessible due to the increase in smartphones and tablets and higher internet penetration. Many brick-and-mortar retailers have rolled out online shopping portals to cater to the growing online retail shopping customer base. Deals and discounts on online shopping also encourage customers to purchase via websites rather than traditional stores. In 2013, UPS’s U.S. domestic package volume grew 3.7% on account of a 17% growth in the U.S. e-commerce sales. E-commerce sales grew 15.7% year-on-year in the second quarter and are expected to grow close to 12% in 2014. This could help increase UPS’ U.S. domestic packages, which will have a positive impact on third quarter revenues. Preparations for holiday season volume will increase operating expense and temper earnings Similar to the previous year, UPS expects to see high package volume driven by e-commerce sales during the holiday season. However, this year UPS intends to be more prepared to handle the overwhelming number of packages. UPS had therefore decided to take up certain measures that will set it back by $175 million. Due to the high operating expense forecast, the company’s management lowered its earnings per share guidance from $5.05-$5.30 to $4.9-$5.0, representing a 7-9% increase over 2013. In anticipation of the high package volume during this year’s holiday season, UPS has decided to add 50 new sorting facilities in existing hubs that will help increase its capacity by 5%. Last year, in order to prepare for the holiday season, UPS had hired around 55,000 seasonal employees. Despite hiring an additional 30,000 before Christmas, UPS faced a lot of difficulties handling the overwhelming number of packages during the holidays. The bad weather conditions also added to UPS’s problems. However, for this year’s holiday season, UPS has decided to hire 90,000–95,000 seasonal employees. Traditionally, operations have been limited on Black Friday, however this year the company will operate for the full day. UPS has also accelerated the rollout of its route optimization software, ORION, which will help reduce delivery times and costs during the peak season. It expects to have around 45% of its drivers using ORION by the holiday season. These preparations should add to UPS’s operating costs for the third and fourth quarters. Revenue per package may continue to decline due to unfavorable package mix Lately there has been a shift in customer preference towards economical means of shipping packages, even if it means waiting a few extra days for their shipments to get delivered. The move towards cheaper shipping options has also been driven by growth in e-commerce. E-retailers prefer to keep their shipping costs to a minimum and pass on any cost savings to their customers. Though e-commerce packages have helped boost UPS’ U.S. Domestic Package volumes, they have negatively impacted yields. In the second quarter 2014, the 60% increase in UPS SurePost volumes, which is a low yield service, led to an unfavorable product mix which resulted in a 2.0% decline in average yield for UPS’ U.S. Domestic Package segment. UPS’s revenue per package was stagnant in 2012 and declined 0.6% in 2013 for the same reason. We expect to see a similar decline in revenue per package in the third quarter 2014. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    P Logo
    Pandora's Margins Will Remain A Concern But Monetization Can Improve
  • By , 10/22/14
  • tags: P SIRI GOOG AAPL
  • At the start of the year,  Pandora Media (NYSE:P) changed its fiscal year to a calender year end. We would like to point out for investors’ benefit that the upcoming Q3 2014 results on October 23 will reflect the company’s performance for the three-month period ending September 30. Although Pandora no longer provides monthly updates for its operating metrics, we expect the steady rise in its revenues and market share continued into the third quarter. However, due to the company’s aggressive investment in sales and marketing capability, its profits likely remained under pressure. Similar to Q2 2014, Pandora’s ad monetization likely grew, both sequentially and year over year, driven by a continued uptick in its mobile ad business. Generally, the third quarter is seasonally better for Pandora as compared to the second quarter, which should  be reflected in its Q3 RPM (revenue per member). The Internet radio provider has a come a long way in terms of creating a sustainable business model and we expect the Q3 results to reinforce this development. Our current price estimate for Pandora stands at $24, implying a premium of more than 10% to the current market price. See our complete analysis for Pandora Media Margins will be a Concern Pandora has stated in the past that royalty rates it pays have increased by 53% in the last five years and will go up by another 9% in 2015. With royalty rates expected to rise each year, the company is focusing on improving its ad targeting in order to command better pricing and sell more mobile inventory slots. For this purpose, Pandora has been growing its sales force for the past several quarters. During the last quarter, the company continued to add new talent to its sales team, that pushed its sales and marketing expenses up by 50% year over year. It increased its employee headcount by 40% year over year with the addition of 15 new quota bearing sales representatives. Pandora had a total team of 343 sales representatives at the end of Q2 2014, while it only had 252 representatives a year earlier. As a result of these aggressive investments, its Q2 losses increased by a staggering 72% (on a GAAP basis) to $11.7 million. We believe that Pandora hired a number of new sales representative in Q3 as well, that will keep its expenses on the higher side. In addition, commissions on subscriptions that the company pays  Google (NASDAQ:GOOG) and  Apple (NASDAQ:AAPL), and soaring product development costs will also weigh on its margins. Monetization Likely to Improve We expect Pandora’s ad RPM levels (revenue per 1,000 listener hours) to be up compared to the third quarter of 2013. There will likely even be some sequential gain in this quarter as advertisers tend to divert a disproportionate amount of their annual budgets to the fourth quarter, followed by a lull in the first quarter, and subsequent improvement in the second and the third quarters. In 2012, Pandora’s RPM improved from $29.33 in the second quarter to $30.30 in the third quarter. The company saw a similar trend in 2013 when its RPM in the third quarter ticked up to $39.68 from $37.89 in the second quarter. Pandora has done exceptionally well in ramping up its mobile ad business, which has resulted in substantial year-over-year gains in its quarterly RPM. This paints a very pleasing picture of the company’s Q3 2014 RPM, which is expected to be higher than $40.11 (Q2 2014). Price Hike won’t have Much Impact Pandora has raised the monthly price of its Pandora One service by $1 to $4.99, making it the first price revision since the service’s launch in 2009. However, this move will not have a significant impact on Q3 2014 results but will have a moderate impact on the company’s full year performance. Most subscribers choose the annual billing cycle and hence, increased revenues from price hike will not be reflected in Q3 results. Subscriber ARPU (average revenue per user) will definitely go up meaningfully next year as most subscribers migrate to the new pricing structure. The price increase will directly flow down to Pandora’s bottom line. Currently the company has about 3.3 million paying subscribers, which represents a small fraction of its overall user base. If the price increase of $1 were to be rolled out to all subscribers immediately, it will result in incremental revenues of close to $40 million. This would lead to cash flows jumping by a similar amount. This is a huge improvement considering that the operating cash flow was negative in 2013, according to our calculations. Going forward, these incremental revenues will see strong growth as we expect Pandora to continue gaining subscribers rapidly. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research
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    Expansion In The Western U.S. To Remain Key Factor For Dunkin' Brands' Top-Line Growth
  • By , 10/22/14
  • tags: DNKN MCD BKW SBUX CMG
  • Dunkin’ Brands (NASDAQ: DNKN) is scheduled to announce its third fiscal quarter earnings report on October 23. The company delivered unimpressive results in its second quarter results, as the comparable store sales of the Dunkin’ Donuts U.S. segment increased just 1.8%, much lower than the company’s expectation of 3 -4% growth. As a result, the second quarter revenues grew just 4.6% to $191 million. Due to the increased competitive activity in the restaurant industry, all the top fast food chains, such as  McDonald’s Corporation (NYSE: MCD),  Starbucks (NASDAQ: SBUX) and  Burger King (NYSE: BKW), are planning to expand their customer base in domestic, as well as international markets. Most of the Dunkin’ brands’ stores in the U.S. are concentrated in the eastern part of the country, and the company has accelerated its expansion process in the western markets. Moreover, at the beginning of the second quarter, the company launched its online cake ordering business for Baskin Robbins U.S., which has been delivering impressive results. Dunkin’ Brands is planning to take this to a global scale in the coming years. We have a $48.59 estimate for Dunkin’ Brands, which is approximately 4.3% above the current market price. See full analysis for Dunkin’ Brands In September, Dunkin’ Brands recently hosted its 2014 Investor and Analyst day. The company officials provided the financial and expansion guidance for the year 2014, as well as for 2015. The company expects a 5-7% system-wide growth in net revenues and 7-9% growth in the net operating income in the fiscal 2014. This might translate to operating margin expansion of about 50 to 100 bps. In terms of segment updates, same store sales figure for Dunkin’ Donuts is expected to grow 2-3% in 2014. Baskin-Robbins U.S. has given a guidance of 1-3% same store sales growth. Has Dunkin’ Brands Taken Enough Measures To Tackle Tough Industry-Wide Competition? Dunkin’ Brands is one of the well renowned and highly successful quick service restaurant (QSR) chains in the world. This has been a tough year for the QSR industry as all the major restaurant chains are facing rising commodity prices and changing dining preferences of people. Dunkin’ Brands is not only facing tough competition within the QSR industry for a larger pie of breakfast market share, but is also fighting a tough battle against the fast-casual segment, which is stealing the customer traffic from the top QSRs. Breakfast Daypart: Menu Additions And Low Menu Prices Might Attract Customers Breakfast is currently the most competitive and popular segment daypart in the industry. Other competitors such as McDonald’s, Starbucks and Burger King are far ahead in this category in term of innovative menu items and loyal customer base.  The company has around 9% share in the breakfast market, much behind McDonald’s. Although over the last couple of years, Dunkin’ Brands has gained reputation, due to its operational quality and consistent effort towards customer satisfaction. Off lately, new brands are trying to enter the industry and are directly targeting the breakfast market. Even though new entrants do not directly impact Dunkin’s business, their entry increases the overall competition in the industry, reducing price manipulation in the market.  In the second quarter, the company introduced new limited offer products such as the Chicken Apple Sausage Breakfast Sandwich, differentiating it from other competitors. Furthermore, the low price of its breakfast menu led to an increase in customer traffic. In the second quarter, the company witnessed the highest afternoon guest count. Even though it was a positive sign for the company, the increased competition slowed down the comparable sales growth, due to lower prices. Stiff Competition From Fast-Casual Segment Fast casual restaurants such as  Chipotle Mexican Grill (NYSE:CMG) and Panera Bread have started eating into the market share of these leading QSR chains for the last couple of years. According to the recent  NPD ’s food-service market research, the customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. People in the U.S. are gradually changing their dining preferences and drifting towards organic food items. A decreasing customer count might hinder the company’s sales growth. The next few quarters would be very crucial for QSRs such as McDonald’s, Dunkin’ Donuts and Subway, where the industry would be reacting to increasing commodity prices on one hand and changing consumer preferences on the other. However, Dunkin’ Brands is yet to prove its menu strength, so that it can boost its customer count. Expansion Remains Main Focus For Dunkin’ Brands In its Investor and Analyst Day report, the company explained its presence in the U.S. through four different categories: core market, established market, emerging market and western market. The chart below explains the geographical presence of the company’s stores in the country with the number of restaurants in each market. Dunkin’ Brands plans on focusing more on the emerging and western markets, where the company has higher growth potential.  In the long term plan, the company plans to add around 5, 000 Dunkin’ Donuts units in the western market, around 3,000 in the emerging markets and only 400 in its core eastern market, to take the total Dunkin’ Donuts U.S. units to 17,000. However, due to strong franchisee demand in the core and established markets, the company has changed its net new openings guidance. The net openings growth in the core market is expected to be in the range 15-20%, revised from the previous guidance of 10-15%. The guidance remains unchanged for net new store development in western market; a growth of 15-20% in fiscal 2014. In California, Dunkin’ Donuts is slated to open 4-5 restaurants by the end of fourth fiscal quarter, much ahead of the schedule. The company announced the locations of its stores in California on June 10 and also mentioned its plans to open 54 more stores in Southern California in the coming years. However, in emerging markets like Atlanta, the company is planning to increase its store count to approximately 120 by the end of 2014. In the emerging markets, the average weekly sales have grown 25% over the last 3 years, whereas the comparable store sales have increased to 7% in 2013 from 1% in 2010. Dunkin’ Donuts U.S. is expected to open 380-410 net new units and Baskin-Robbins U.S. is expected to open 5-10 net new units in 2014. The company expects the net restaurant growth in 2015 to be more than 5%. Dunkin’ Brands is also accelerating its expansion process in Europe, where the company is keen on targeting high GDP countries. Currently, there are 144 Dunkin’ Donut stores across Europe and expects to open atleast 45 new stores in the region in the next fiscal year. Despite the stronger customer base and huge brand appeal of other top fast food brands in these regions, the company is confident of its top-line growth from new store openings. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Coca-Cola Earnings Review: Volatile Emerging Economies Limit Top Line Growth
  • By , 10/22/14
  • tags: KO PEP DPS BUD
  • The Coca-Cola Company (NYSE:KO) reported less than expected financial results for the third quarter on October 21, underscoring headwinds in the core sparkling portfolio, which forms nearly three-fourths the valuation for the company by our estimates, and macro volatility in some of the key emerging markets. With revenues remaining flat and global volumes growing only 1% in Q3, Coca-Cola’s stock took a hit just after the announcement of quarterly results, declining by 5.5%. Non-alcoholic beverages in the mature markets of North America and Europe, which together form around 35% of Coca-Cola’s net volumes, are showing little volume growth potential. In addition, with declining consumer spending in emerging economies, Coca-Cola’s top line growth might remain limited in the coming quarters as well. In order to spur income growth and subsequently improve cash flow, the company has now laid out further strategic plans. As part of the extended strategic priorities, Coca-Cola has extended its plans to save an incremental $1 billion in productivity by 2016, to $2 billion by 2017 and $3 billion by 2019, through system standardization, supply-chain optimization, and industrious resource and cost allocation. While revenue growth might remain restricted, some of the productivity savings will be redirected to media investments, which could then spur demand for Coca-Cola’s offerings and subsequently boost sales. We estimate a $41.86 price for Coca-Cola, which is around 3% above the current market price. See our full analysis for  Coca-Cola Macro Volatility In Emerging Markets Hampers Top Line Growth With limited beverage growth, especially in carbonated soft drinks (CSD), in developed markets, Coca-Cola and other beverage companies have looked for growth in emerging economies where penetration is still low and incomes are rising. However, economic volatility in some of the key markets in Latin America and Eastern Europe stalled growth for Coca-Cola this quarter. Volatile economies in Latin America could be detrimental to the overall results for the company, as this operating unit typically forms close to 30% of the net volumes, with Mexico being the largest consumer of Coca-Cola’s offerings in the world. The bright points for the beverage maker were that Mexico volumes grew 1%, despite the soda tax enacted in the beginning of the year, and overall Latin America volumes rose 2% in Q3. However, a currency headwind of 6 percentage points dragged down operating income from the region, which declined 9% year-over-year. Although this figure was negatively impacted by structural changes, including a new provision in Venezuela imposing a maximum threshold for profit margins, unfavorable currency translations could continue to hamper top line growth for Coca-Cola in the near term. On the other hand, while overall Eurasia and Africa volumes rose 5%, unit sales for the Russia, Ukraine and Belarus business unit fell 3% in Q3. The inflationary environment and slow economic activity in this region slowed volume sales as consumers looked to cut down on unnecessary expenses, especially on ”recreational” beverages. Moreover, unfavorable currency translations further lowered net revenues from this region for Coca-Cola. Eastern Europe forms less than 3% of the net volumes for Coca-Cola, and with lower volume sales due to negative consumer spendings coupled with currency headwinds, the company’s profitability could significantly decline in the region going forward, given the high proportion of fixed costs for beverage manufacturers. In fact, currency headwinds in emerging markets could lower Coca-Cola’s net operating income in the next quarter by as much as 7%. Domestic Volumes Continue To Decline For Coca-Cola As expected, CSD volumes declined in North America by 1% for Coca-Cola, as consumers continue to shift away from sugar and calorie-fueled beverages. A new revelation however was a fall in still beverage volumes for the company as well, a segment that had previously seen consecutive quarters of growth. This was mainly on the back of slowing volumes for juices, which are also suffering due to consumer health concerns over the high sugar content in these drinks. As the domestic market generally forms one-fifth the volumes for Coca-Cola, the company depends on its operating performance in this region to spur overall growth. With lower than expected sales in emerging economies, Coca-Cola might look to extract higher sales from North America through new launches and strategic investments. New launches such as Coca-Cola Life, a CSD naturally-sweetened with stevia, could attract consumers who look for lower calorie consumption, but at the same time are skeptical about the safety of artificial sweeteners in Diet drinks. Coca-Cola’s top line could expand in the domestic market despite expected flat to negative volume growth in the coming quarters due to an emphasis on small package sales. Despite volumes declining in North America, net sales remained even due to a positive price mix, buoyed by a 3% favorable price mix in sparkling beverages. Demand for small-sized offerings has risen, despite the mini cans containing the same calorie count per ounce as the regular 20-ounce bottles, as customers look for lesser cumulative calorie consumption. According to Euromonitor, while sales in the overall U.S. CSD market remained flat last year, mini can sales rose 3%. The smaller 7.5-ounce mini cans have higher pricing per ounce, as compared to the 20- and 24-ounce packages, thereby boosting net pricing for companies. Smaller package sales led volumes for Coca-Cola in North America this quarter as well, and with volume growth expected to remain limited in the region in the coming quarters, the company might look to expand its top line by focusing on price mix. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Hybrid Cloud, Network Virtualization, End-User Computing Drive VMware's Q3 Results
  • By , 10/22/14
  • tags: VMW EMC NTAP HPQ FFIV DELL
  • VMware (NYSE:VMW) announced its third quarter earnings on Tuesday, October 21. The company reported an 18% increase in net revenues over the prior year quarter to almost $1.52 billion – close to the upper end of the guidance given at the end of Q2. Services revenues were up by 21% y-o-y to $876 million while software license sales rose by 14% to $639 million. VMware has maintained its full year net revenues guidance at just over $6 billion, which is 15-16% higher than 2013 revenues. In line with our expectations, software licenses gross margin (GAAP) expanded by almost 2 percentage points to 92.8%. On the other hand, as the company generated higher service revenues from hybrid clouds, network virtualization and end-user computing, its cost of services rose by nearly 50% y-o-y to $196 million. As a result, the gross margin (GAAP) for the services division was about 4 percentage points lower than the year ago period at 77.6%. Moreover, VMware’s operating expenses, including research and development, sales, marketing and other administrative expenses, were 25% higher than the year-ago quarter at over $1 billion in Q3. Consequently, the company’s reported net income was 20% lower than previous year levels at $244 million. However, VMware’s non-GAAP adjusted net income was about 4% higher than Q3 2013 at $377 million – in line with the company’s expectations. VMware expects its non-GAAP operating margin to be 31% for the full year – about 150 basis points higher than the operating margin in Q2. The company expects that the integration of technology from the AirWatch acquisition and related cost synergies could help improve profitability through the rest of the year.
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    Nokia Earnings Preview: Networks In Focus
  • By , 10/22/14
  • tags: NOK S CHA CHL
  • Nokia (NYSE:NOK) is scheduled to release its Q3 results on Thursday, October 23. In the previous quarter, the company beat market estimates on the back of robust global LTE spending and a continued high level of profitability in its Networks business. Although Nokia continued to see its networking services revenues shrink on the back of divestitures and contract exits in unprofitable regions, this impact was somewhat offset by healthy demand for mobile broadband infrastructure among carriers, especially in regions such as China, where the transition to 4G LTE is underway. Even though overall sales declined in high single-digits on a year-over-year (y-o-y) basis, they grew in double-digits over the previous quarter. On the cost side, the company reported an operating profit of $378 million and operating margin of 11% for Q2, significantly above market expectations. Looking at its progress in maintaining profitability along with top-line gains, the company raised its operating margin estimate for Networks to be slightly above the higher end of its long-term target of 5-10%. When Nokia comes out with its third quarter results, we expect its overall sales decline to improve from last quarter’s figure of about 10%. The company has built a strong pipeline of orders on a number of recent contract wins in Europe, such as Everything Everywhere and Vodafone, which should help bolster sales. A revenue boost is expected in the U.S and China as well, with carriers such as T-Mobile (NYSE:TMUS),  Sprint (NYSE:S),  China Mobile (NYSE:CHL) and  China Telecom (NYSE:CHA) increasing their network spending. However, lower margin LTE deals in China may put a dent in the company’s operating profits for the quarter. Our $8 price estimate for Nokia is in line with the current market price.
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    Southwest, JetBlue and Alaska's Earnings Preview: Solid Demand For Air Travel Will Likely Lift Results
  • By , 10/22/14
  • tags: LUV
  • Southwest (NYSE:LUV), JetBlue (NASDAQ:JBLU) and Alaska (NYSE:ALK) will announce their third quarter results Thursday, October 23. These carriers are coming off a good first half in which they reported healthy growth in their revenue and profit on higher demand for air travel. We anticipate these carriers to retain their growth momentum in the third quarter as the demand environment has remained healthy, allowing these carriers to continue to expand their flying capacities. In addition, lower global crude oil prices during the quarter will likely provide some tailwind to the third quarter profit of these carriers. Southwest’s Q3 Earnings Preview In the third quarter, Southwest expanded its flying capacity marginally, but the solid demand for air travel in the domestic market raised the carrier’s average occupancy rate (percentage of seats occupied by revenue paying passengers) by around 3.5 points to over 84%, from under 81% in the same period last year. We figure this sharp growth in occupancy rate coupled with marginally higher flying capacity will significantly raise Southwest’s third quarter passenger traffic. In addition, in the second quarter, we saw Southwest’s average passenger fare rise by 8% annually to $163, reflecting that the carrier hiked its fares on many routes across its system over the past year. We figure gains from these past passenger fare hikes will likely continue to lift Southwest’s average passenger fare in the third quarter. Higher passenger fare and higher passenger traffic will in turn lift Southwest’s third quarter top line. On the margin front, Southwest will gain from its ongoing fleet modernization. The carrier is adding Boeing 737-800s to its airplane fleet. These airplanes with their higher cost efficiency standards, compared with many older airplanes in Southwest’s fleet, are lowering the carrier’s costs. In addition, Southwest is benefiting from the ongoing transition of Boeing 717s from its airplane fleet to Delta’s fleet. These 717s are being replaced by larger 737s generating revenue opportunities at similar per seat costs. In our opinion, these fleet initiatives will help lower Southwest’s costs supporting growth in its second quarter profit. All in all, Southwest looks set to post a solid third quarter. We currently have a stock price estimate of $34 for Southwest, around 4% ahead of its current market price. See our complete analysis of Southwest here JetBlue’s Q3 Earnings Preview The solid demand for air travel also raised JetBlue’s average occupancy rate by around 1 point in the third quarter. This rate of increase in JetBlue’s occupancy rate is below that of the increase in Southwest’s occupancy rate, as JetBlue added flying capacity to its system at a much higher rate. During the third quarter, JetBlue raised its flying capacity by about 4% annually, compared with about a 1% year-over-year hike in Southwest’s flying capacity. However, despite the lower rate of an increase in occupancy rate, JetBlue’s overall passenger traffic rose by over 5% annually in the third quarter driven by the sharp rise in its flying capacity. So, we figure JetBlue too will likely post strong growth in its third quarter top line. Additionally, we see no major cost increases for JetBlue in the third quarter. The carrier’s profit might see some tailwind from sale of its LiveTV subsidiary. In July, JetBlue had said that it anticipates growth in costs to moderate with divestiture of LiveTV, which provides in-flight entertainment options. On the whole, like Southwest, JetBlue looks set to post a good third quarter. We currently have a stock price estimate of $12 for JetBlue, around 5% ahead of its current market price. See our complete analysis of JetBlue here Alaska’s Q3 Earnings Preview In the third quarter, Alaska raised its flying capacity by about 8% annually – the highest rate of capacity addition for any major U.S. carrier. This again testifies to the solid demand for air travel in the domestic U.S. market. This aggressive capacity expansion by Alaska raised its third quarter passenger traffic also by about 8% annually. Additionally, Alaska will likely see strong growth in its ancillary revenue driven by rate hikes that the carrier implemented in its baggage fee and ticket change fee in October last year. So, Alaska too will likely post growth in its top line in the third quarter on higher passenger traffic and higher ancillary revenue. We will however be noting the trend in Alaska’s third quarter unit revenue – amount collected from each passenger per seat for a mile of flight. In the second quarter, growth in Alaska’s unit revenue had lagged other carriers due to rising competition that the carrier faced from Delta in its core Seattle market. We figure Delta’s rapid expansion at Seattle since the start of 2014 has hit Alaska’s pricing ability in this market, which provides a significant portion of Alaska’s overall passenger traffic. Till last year, Alaska dominated the Seattle market, and therefore had considerable pricing power in this market. But, beginning 2014, with Delta raising its number of flights at Seattle in order to establish the city as its international gateway to Asia, Alaska’s pricing ability in this market has declined. So, we will be noting how Alaska’s unit revenue trends in the third quarter. A decline in the carrier’s unit revenue could temper gains from its higher passenger traffic. On the margin front, we expect Alaska to gain from its past cost cutbacks. (See How successful has Alaska been in lowering its costs? ) So, Alaska too will likely post a good third quarter. We currently have a stock price estimate of $48.20 for Alaska, around 5% ahead of its current market price. See our complete analysis of Alaska Air Group here View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Juniper Earnings Preview: Edge Router Sales, Cost Savings In Focus
  • By , 10/22/14
  • tags: JNPR CSCO
  • Juniper (NYSE:JNPR) is scheduled to announce its Q3 2014 results on Thursday, October 23. The company reported a strong set of results in the previous quarter, with sales growing 7% year-over-year (y-o-y) to $1.23 billion, matching the upper end of its guidance. However, a lower-than-expected outlook for the third quarter brought the stock down by about 10% in intraday trading when it released second quarter earnings on July 23. The company’s stock witnessed another steep fall last week when it issued preliminary Q3 financial results, which stated that it was likely to miss its already lowered revenue guidance of $1.15-$1.20 billion on account of sluggish demand from service providers in the U.S., and the expected revenue for the third quarter now stands at $1.11-$1.12 billion. The negative sales revisions have raised a lot of questions on Juniper’s business strategy and sustainability. This is because more than two-thirds of Juniper’s overall revenues come from service providers, and any sluggishness in demand significantly impacts the company’s top line as well as bottom line. The router business, accounting for about 50% of Juniper’s sales and 40% of its value according to our estimates, is currently in a transitional phase as it competes against white boxes as well as software-run virtual systems. We believe improved router sales will be key to the company’s revival, and it will be interesting to see whether switching sales can sustain their double-digit sales growth in the near term. Our  $28 price estimate for Juniper is currently significantly ahead of the market price, and we will revise our pricing model following the earnings release. 
    DFS Logo
    Growth In Loans Drives Discover's Third Quarter Earnings
  • By , 10/22/14
  • tags: DFS V MA AXP
  • Discover Financial (NYSE:DFS) announced its third quarter earnings on Tuesday, October 21. The company reported net income of $644 million, up 8% year-over-year but about flat sequentially. Total revenues, net of interest income, increased by 6% year-over-year to $2.2 billion driven by growth in total loans and Discover card sales.  We have a price estimate of $64 for the company’s stock, which is in line with the current market price.
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    Investment Income, Lower Catastrophe Losses Lift Travelers' Earnings
  • By , 10/22/14
  • tags: TRV MET AIG
  • The Travelers Companies (NYSE:TRV) announced third quarter earnings on Tuesday, October 21, reporting a 6% year-over-year jump in net income to $919 million. Operating income improved from $673 million in the previous quarter to $894 million after declining 18% year-over-year during the last quarter. This was due to a rise in investment income as well as lower catastrophe-related losses during the quarter. However, the combined ratio – the ratio of claims to premiums – was 90% in the third quarter compared to 88.1% a year ago, owing to higher-weather related losses. Total revenues of about $6.9 billion were up 7% year-over-year, fueled by a 7% increase in net written premiums over the previous year. Total net written premiums for the quarter were just over $6 billion, largely driven by the acquisition of Dominion in November 2013. Discover’s stock closed at $94 on Tuesday, up more than a percentage point on the back of the profitable quarter. We have a price estimate of $107 for the company’s stock and are in the process of updating our model to account for the latest results.
    The “Walking Dead” CEOs
  • By , 10/22/14
  • tags: LGF KO
  • Submitted by Wall St. Daily as part of our contributors program The “Walking Dead” CEOs By Robert Williams, Founder   With blood, guts, and even a few red meat explosions, Season Five of AMC’s smash hit series, The Walking Dead, hit the airwaves last week. As it turns out, interest in the coming zombie apocalypse is only getting hotter, as the debut episode set cable television records, pulling 17.3 million viewers. So in the spirit of The Walking Dead, I compiled a list of five big shots on Wall Street who are far beyond saving. Epic failures have left each without a heartbeat, and their fall from grace won’t be pretty. A word of caution, though . . . this list may shock you. 1. Jon Feltheimer, CEO, Lions Gate Entertainment Corp. ( LGF ) Lions Gate has been an entertainment industry darling since 2012, when it released the first installment of The Hunger Games trilogy and also acquired Summit Entertainment, the company with rights to the Twilight series. In fact, from 2012 until October 2013, shares skyrocketed almost 350% higher. Since then, though, Jon Feltheimer’s group has struggled to live up to its own success. The second installment of The Hunger Games trilogy : Catching Fire, failed to move share prices, and the latest installment of a once-profitable franchise, The Expendables 3, bombed at the box office. With no new films to speak of, Lions Gate is relying on the final chapter of The Hunger Games to stop its current slide (shares are down 20% from their peak). Top it all off with a lawsuit from Boardwalk Empire actress Paz de la Huerta, and it looks like Feltheimer’s days are numbered. 2. Michael Corbat, CEO, Citigroup Inc. ( C ) If you thought the situation was grim for Walking Dead’s post-apocalypse survivors, then you haven’t seen Citigroup lately. Consider this: The United States’ third-largest bank, which actually makes a majority of its income from foreign markets, is pulling its business out of a whopping 11 different countries. CEO Michael Corbat calls it a strategy to “simplify the firm’s international division,” according to Industry Leaders Magazine, but the reality is that Citigroup has far too many unprofitable ventures in up-and-coming markets. Additionally, Co-President Manuel Medina-Mora – who many saw as the future CEO – is being forced out by the board after extensive fraud was uncovered in his Mexico unit. That’s bad news for Corbat, who could be next on the chopping block. 3. Muhtar Kent, CEO, Coca-Cola Company ( KO ) As America slowly, reluctantly faces its obesity epidemic, Coca-Cola has been faced with a daunting task: Continue selling soda to people who don’t want to be fat anymore. As John Sicher, Publisher of Beverage Digest, put it, “Carbonated beverages are in precipitous decline. The obesity and health headwinds are difficult and getting stronger.” In response, Coke has made a few interesting (read: desperate) moves. First, the company announced its collaboration with Keurig Green Mountain ( GMCR ) to put Honest Tea products in K-Cup packs. While tea may indeed be a more sustainable beverage than soft drinks, it’s hard to imagine it replacing Coca-Cola. Next, Coke decided to resurrect Surge, a brand that lasted just six years after its initial launch, and sell it exclusively on Amazon. Coke claims that it brought Surge back “in part” due to “a passionate and persistent community of brand loyalists,” but that sure sounds like a last-ditch cash grab to me. If it doesn’t work, CEO Muhtar Kent is as good as dead. 4. John Paulson, Founder, Paulson & Co. John Paulson is known as one of the most aggressive hedge fund managers in America, and it’s made him a billionaire. But this time, it looks like Paulson’s aggression is coming back to haunt him. His hedge fund, Paulson & Co., placed a huge bet on a tax inversion strategy and bought nearly 28 million shares (just under 5%) of Irish biotech company, Shire ( SHPG ). Unfortunately for Paulson, the company planning to acquire Shire has now reconsidered its bid because of new tax regulations that make the deal – and the tax inversion – less attractive. The news sent Shire plunging, with shares losing 23% on the London Stock Exchange on Wednesday. To put that into perspective, Business Insider reports that Paulson suffered $782.8 million in paper losses in just one day when the news broke. That’s a gruesome figure, and it could prove to be the end of Paulson. 5. Jonathan L. Steinberg, CEO, WisdomTree Investments ( WETF ) WisdomTree has built its business as an ETF sponsor and index developer, and share prices are up 163% since the firm launched its first ETF in 2006 – but that doesn’t tell the whole story. You see, WETF shares peaked last December and have been on a brutal slide since then, losing 40% of their value in 10 short months. Part of the problem is that ETFs charge relatively high fees, while many holdings are based on the size of the companies as opposed to their quality. On top of that, new investment vehicles like Acorns and Motif Investing are changing the way people think about retail investing. Motif allows user to essentially build their own index for one small fee, thus cutting out the ETF middle man. It’s a game-changing technology that could end up being the kill shot to ETF providers like WisdomTree and its CEO, Jonathan Steinberg. Onward and Upward, Robert Williams The post The “Walking Dead” CEOs appeared first on Wall Street Daily . By Robert Williams
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